The Intelligent Asset Allocator

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk, William J. Bernstein

Rating: ★★★★½

I read this book many years ago but on recommending it to a friend of mine who was looking for advice on investments I thought I’d better go back for a refresher in case he asked me any questions! Bernstein is a very interesting guy, a self taught financial engineer after retiring from a career in neurology he possesses a very pragmatic approach to investing and shares a good chunk of my views on the capital markets (so I’m somewhat biased in recommending this book!). This is an excellent book for someone staring out with investments from square one, as well as being a worth refresher for even experienced practitioner. He wades through the basic building blocks of financial markets, discusses pricing of instruments and delves into his view on portfolio theory and construction. The last sentence below from the excerpt is definitely something to keep in mind: unless you already know the material in this book like the back of your hand, it’s going to take a while to get through it, no skimming on this one if you want to absorb everything.

Excerpt: Imagine that you are suddenly transported to a country you have never before visited. Trying to find your way home, you are told that there is a new, well-equipped, comfortable, and reliable car parked nearby. You are handed the keys and told to drive to an airport several hundred miles away where a flight home awaits you.

What do you do? Do you stride to the car without further ado, drive away, and hope that by luck you can pick your way to your intended destination? You hesitate. It does not go unnoticed by the locals that you are a rube, and further the proud driver of an expensive automobile. Several sleazy characters crowd around you to offer their expert assistance. Do you trust yourself to one of them?

Hopefully you do neither and instead find the nearest book shop, purchase a detailed road map, and plot the most efficient route to the airport. Only then do you start on your way.

Most investors find themselves in a very similar situation. Many choose the first course and begin their investing careers with bold action (usually committing a large amount of their capital to a very risky market sector at or near its top). They rarely have a clear idea of exactly where they are headed, or how to get there. Many more know that they are lost and depend on the kindness and expertise of strangers (otherwise known as “account executives” or “financial planners”) to find their way. All too often, the interests of these “experts” are very different from their own.

Learning how to invest successfully on your own is much like getting from one city to another in the manner of our fictional traveler. The road map is a simple one and will be briefly described below. The journey will pass particular landmarks in a precise order; each one will be described in its own chapter. The journey will be slow and painstaking at times, and there will be no shortcuts. This book cannot be read quickly; it must be methodically consumed, one page and chapter at a time.